Tag: Koshy Mathai

A delegation from the International Monetary Fund (IMF) expressed surprise at the “resilience” of the Maldivian economy in a meeting with MPs on the parliament’s public finance committee yesterday.

Dr Koshy Mathai, resident representative to Sri Lanka and Maldives, told MPs that the IMF was surprised that the economy has stayed afloat for years despite longstanding fiscal imbalances.

“For a long time we’ve been saying that reserves at the MMA [Maldives Monetary Authority] are very low and that the fiscal deficit is quite difficult and we expect the economy to run into some problems. But somehow the economy has shown resilience, a lot of resilience, and we’ve been surprised – happily surprised but surprised nonetheless,” he said.

The IMF was interested in “carefully studying” how the domestic economy has remained resilient in the face of soaring public debt and persisting budget deficits, Mathai said.

“Imports are on the shelf. If you go into a shop, you’ll find a wide range of imported goods there. You see people with motor scooters and cars and smartphones. You see people going on travel. All these are available, are done, even while the level of reserves at the MMA is quite low,” he observed.

As the IMF delegation currently in the Maldives was on “fact-finding” or “exploratory mode” ahead of the organisation’s article IV consultation later this year, Mathai told the MPs that the team did not have “comprehensive policy recommendations” to share.

Fiscal consolidation

“One area where we have more clear ideas is an area where we’ve had discussions in the past, and that’s the need for fiscal consolidation,” Mathai continued.

Noting that “fiscal problems have been at the root of so many crises” in countries large and small, Mathai said that the the Maldives had “a government budget envelop that is very difficult to finance.”

“The deficit is quite large. Financing is difficult to find. Banks are not that willing to subscribe to treasury bills. We see treasury bill yields rising quite sharply. MMA external financing is difficult to mobilise as you all know. We’re left then with MMA printing money in order to finance expenditures,” he explained.

A second option was “running up arrears, unpaid bills to domestic suppliers,” he added.

Both methods posed serious challenges, Mathai continued, as the government’s failure to pay its bills “creates ripples effects throughout the entire economy.”

Moreover, printing money to finance deficit spending “puts a lot of pressure on prices” and central bank reserves, he said.

“Because in a small country like the Maldives, when the MMA prints money, that is an injection of purchasing power into the economy, it means more people can import things,” Mathai said.

“As I said, the system seems to work. The parallel market somehow is letting the economy work,” he observed.

Solutions

As new sources of financing the budget were not available in the short-term, Mathai suggested targeting subsidies to the poor and increasing tourism taxes.

“The electricity subsidy is one that goes to even the richest strata of society. Basic food subsidies are being enjoyed now by the resorts, and never mind the resorts, are being enjoyed by wealthy foreign visitors who stay at the resorts. That to us seems like a totally unnecessary policy,” he said.

He added that “substantial savings” could be made from the budget by targeting subsidies to those most in need of assistance.

Mathai also argued that the rates of taxation in the tourism sector were “quite low” compared to other tourist destinations.

Mathai said he paid “north of 20 percent” in taxes at a hotel in Fiji while the Tourism Goods and Services Tax (T-GST) in the Maldives was only recently raised to 12 percent.

It would not be “a tax on business” that would slow down the economy, Mathai added.

“Rather it is saying people are coming and enjoying all that the Maldives has to offer, so let them pay something for it,” he said.

As 70 to 80 percent of the Maldivian economy was “driven by tourism,” Mathai said that it was “only natural that the [tourism industry is] contributing resources for the economy to operate.”

He added that “rates of return on Maldivian resorts are among the highest in the world” with profitable payback periods.

However, compared to other tourism-dependent economies, Mathai said that government expenditure in the Maldives was comparatively “very high” due to the geographic dispersion of the population and the large public sector wage bill.

In the medium-term, Mathai recommended taking measures to reform the civil service, improve delivery of public services and increase efficiency by economising.

“Ultimately we need to do a structural adjustment to the budget so that it’s more sustainable,” he concluded.

The International Monetary Fund (IMF) has urged the government to implement a raft of measures to raise revenue and reduce spending to rein in a ballooning fiscal deficit.

In a statement on Monday following a visit by an IMF mission for the 2012 Article IV Consultation – the organisation’s “regular exchange of views with member countries” – the IMF team noted that strengthening government finances was “the most pressing macroeconomic priority for Maldives”.

“The fiscal deficit is expected to rise in 2012 to 16 percent of GDP [Gross Domestic Product] in cash terms, and likely even higher if one accounts for the government’s unpaid bills, accumulated in an increasingly challenging environment for financing,” the IMF mission stated.

In April 2012, the head of a previous IMF mission to the Maldives told Minivan News that the country’s fiscal deficit was “substantially understated” at less than 10 percent of GDP as projected in the 2012 budget, predicting a figure closer to 17.5 percent of GDP or higher.

“The large deficit has implied a rise in the public debt ratio, which now stands at over 80 percent of GDP, and has also helped to boost national imports, thus worsening dollar shortages in the economy and putting pressure on MMA [Maldives Monetary Authority] reserves,” the more recent IMF mission said in its statement.

The forecast for the current account deficit was “nearly 30 percent of GDP this year.”

“Gross international reserves at the MMA have been declining slowly, [and] now account for just one and a half months of imports, and could be more substantially pressured if major borrowings maturing in the next few months are not rolled over,” the IMF mission warned.

“On the expenditure side, electricity subsidies can be better targeted to the needy, costs of the health programme Aasandha can be further rationalised and reduced, wages should be controlled, including through the establishment of a Pay Commission, and a plan could be laid out for medium-term civil service reform.”

The mission suggested that tighter monetary policy could “help support the exchange rate and the needed external adjustment.”

“Higher Treasury bill yields, in conjunction with some technical changes to the monetary operations framework, may also help to ease the government’s financing difficulties,” the mission noted.

“Finally, resorts’ foreign-exchange licenses could be restricted to small-value amounts to help channel dollars through the formal banking system.”

Economic growth in 2012 was meanwhile expected to slow to three and half percent on the back of “depressed tourist arrivals earlier in the year and weak global conditions,” which have been “only partially offset by strong performance in construction and fisheries-related manufacturing.”

Inflation was “elevated on account of increases to GST and international food prices but is expected to slow to under 6 percent next year and decline further thereafter.”

Following consultations with President Dr Mohamed Waheed Hassan Manik, Finance Minister Abdulla Jihad, members of parliament and MMA Governor Dr Fazeel Najeeb, the mission noted that “the authorities have expressed an interest in a Staff Monitored Programme,” for which further discussions would be held.

The mission said it would prepare a report for consideration by the IMF Executive Board in January 2013.

“Rationalising”

Following the visit of the IMF team from October 30 to November 12, head of the mission Koshy Mathai met the press at the MMA auditorium on Monday.

Mathai revealed that the mission had recommended increasing T-GST to 15 percent, noting that “the Maldives takes a smaller tax from tourism industry than other small nations such as Fiji, Mauritius, and Seychelles, who are heavily dependent on tourism.”

However, unlike the other countries, Mathai said, “rich tourists visit the Maldives. For them, an increase in prices will not be a deterrent.”

However, most of the measures have not been implemented. Appealing for cooperation from government offices to reduce their budgets, Finance Minister Jihad told Minivan News in September that “everyone should tighten their belts.”

Jihad told local media yesterday that the ministry accepted the recommendations and would work with parliament to implement the measures in next year’s budget.

Mathai meanwhile observed that government subsidies on foodstuff imported by the State Trading Organisation (STO) benefited rich and poor alike.

“The resorts are buying these staple foods at highly subsidised prices,” he noted.

Moreover, the government’s universal health programme Aasandha needed changes to reduce costs, Mathai suggested, such as “moving to generic drugs and controlling payments that are made to foreign hospitals.”

“Harmonising” the pay scale

Mathai also stressed the importance of instituting a Pay Commission to streamline the pay structure for government employees.

“We have a lot of independent institutions in this country and they are all on different pay scales,” he observed.

“There’s no harmonisation within the public service. There are radically different pay scales. And that has problems in terms of incentivising staff to belong to one institution versus the other. And it also implies a lot of cost for the government. So establishing a Pay Commission that can set up a rational system of compensation for the entire public service seems like a priority.”

As part of an alternative “bottom-up approach,” Mathai revealed that the new government has completed “a detailed jobs analysis in many ministries.”

The analysis was intended to identify “where more staff need to be hired and [whether] some staff can be let go” as well as to determine “the best way of rationalising the size and composition of the civil service to make it deliver services most efficiently for the Maldives.”

In the medium term, said Mathai, a policy of population consolidation could ensure that service provision and administrative costs were “not duplicated.”

“To us that seems like a very logical thing, a very logical way of reducing costs, but of course it has to be done in a voluntary way,” Mathai said.

Economic diversification was also necessary to ensure that the economy has “more than one or two bases to go forward and reduce vulnerabilities to risks,” he added.

According to a report by the World Bank in May 2010 – which identified the dramatic growth of the public sector wage bill as the origin of the Maldives’ ongoing fiscal imbalances – increases to the salaries and allowances of government employees between 2006 and 2008 reached 66 percent, which was “by far the highest increase in compensation over a three year period to government employees of any country in the world.”

Former President Maumoon Abdul Gayoom responded to growing calls for democratisation with “a substantial fiscal stimulus programme” of increased government spending, “much of which was not related to post-tsunami reconstruction efforts.”

“This strategy led to a large increase in the number of civil servants from around 26,000 in 2004 to around 34,000 by 2008 or 11 percent of the total population. Thus the government simultaneously increased the number of public sector workers as well as their salaries,” the paper noted.

However, the new government’s efforts to enforce pay cuts of up to 20 percent and downsize the civil service – which employs a third of the country’s workforce – were met with “a severe political backlash from parliament,” the UNDP paper observed.

Introducing an economic reform package in late 2011, former President Mohamed Nasheed’s administration insisted that increased revenue from new taxes would match expenditure, and boasted that the 2012 budget was the first in many years to balance income and expenditure.

Monetary policy

Meanwhile, on the recommendation to raise rates on T-bills to finance government spending, Mathai suggested that if the government was “willing to pay higher yields, maybe the banks would be willing to subscribe.”

Mathai cautioned against loosening monetary policy “when dollars are at short supply and the local currency is under some pressure, as it has been for years.”

“Loosening the policy means pushing the economy to grow faster, creating more import demand, creating more demand for dollars – you don’t want to flood the system with rufiyaa so that people can bid many rufiyaa for each dollar in the parallel market,” he explained.

“Rather, you want to absorb the rufiyaa so they can’t bid so many rufiyaa and parallel market rates come down.”

The IMF mission also believed that financial supervision of the banking system “could definitely be strengthened,” Mathai said, suggesting that “some leeway recently given in terms of provisioning requirements for banks could be rolled back and banks should be required to comply with the original rules, which were tougher.”

On regulatory measures that could be taken to alleviate the dollar shortage, Mathai suggested “making sure that resorts that are dealing with foreign exchange don’t have unrestricted licenses to deal with any amount of money.”

Resorts should be “restricted to small value transactions that are appropriate for the visitors that are staying there,” he said.

“We would basically see how the government is doing against its own targets – it would set targets for itself for performance of these different economic areas – and then if the track record is built up and things are going well, then maybe later we could discuss having a programme where money is disbursed,” Mathai said.

Asked about the previous administration’s decision to float the rufiyaa – which the IMF praised as “a bold step” – Mathai said the IMF’s “fundamental suggestion had always been, and remains, to tighten the fiscal deficit.”

The dollar shortage could not be tackled without reducing government spending, he explained, because “devaluation alone will never succeed.”

“What happened last year is basically that the fiscal position didn’t really improve – it improved in cash terms, but you know a lot of bills were not paid,” he said. “So really there wasn’t any tightening of fiscal policy. I think that’s the fundamental reason why devaluation was not as successful as it could have been.”